Consider the Regression Equation: R_i R_f = G₀ + G₁b_i

question 24

Multiple Choice

Consider the regression equation: r_i r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it
where:
R_i r_t = the average difference between the monthly return on stock i and the monthly risk free rate
B_i = the beta of stock i
S²(e_i) = a measure of the nonsystematic variance of the stock i
If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₁, to be

• A) 0.
• B) 1.
• C) equal to the risk free rate of return.
• D) equal to the average difference between the monthly return on the market portfolio and the monthly risk free rate.
• E) equal to the average monthly return on the market portfolio.

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Definitions:

Exchange Rates

The rate at which one currency can be exchanged for another, influencing how much of one currency you get for another.

Financial Statements

Formal records of the financial activities and position of a business, individual, or other entity, typically including the balance sheet, income statement, and cash flow statement.

Interim

Refers to the financial reports that are produced for a period shorter than a fiscal year, often quarterly.

Foreign Currency Borrowing

The action of taking a loan denominated in a currency other than the domestic currency of the entity borrowing.